2/10/2012

Greece deal fails to convince, EU demands more

Greek political leaders said they had clinched a deal on economic reforms and spending cuts needed to secure a second bailout, but euro zone finance ministers demanded more measures and a parliamentary seal of approval before providing the aid.

The European Union and the International Monetary Fund have been exasperated by a string of broken promises and weeks of wrangling over the terms of a 130 billion euro bailout, with time running out to avoid a default.

Finance ministers of the 17-nation euro zone meeting in Brussels warned there would be no immediate approval for the rescue package and said Athens must prove itself first.

Jean-Claude Juncker, who chairs the Eurogroup, set three conditions, saying the Greek parliament must ratify the package when it meets on Sunday and a further 325 million euros of spending reductions needed to be identified by next Wednesday, after which euro zone finance ministers would meet again.

"Thirdly, we would need to obtain strong political assurances from the leaders of the coalition parties on the implementation of the programme," Juncker told a news conference after six hours of talks in Brussels. "Those elements needs to be in place before we can take decisions."

"In short, no disbursement before implementation."

Facing elections as soon as April, Greece's party leaders have been loath to accept the lenders' tough conditions, which are certain to be unpopular with increasingly angry voters.

Greek Finance Minister Evangelos Venizelos flew to Brussels after all-night talks involving Prime Minister Lucas Papademos, leaders of the three coalition parties and EU and IMF inspectors. He left the Brussels talks quickly, telling reporters Greece faced a choice of staying in the euro or leaving, Bloomberg reported.

A spokesman for the Greek representation in Brussels could not immediately confirm the comment.

Papademos' office had said a final 300 million-euro gap was bridged on Thursday in talks with the troika of the European Commission, the European Central Bank and the IMF, and endorsed by the party leaders.

The Greek government called on the coalition parties to support the deal when it comes to parliament, saying the Brussels meeting showed they were only half way there.

"The first step is for parliament to approve it, showing political parties' commitment to the targets and the policies of the new economic programme. It's time all of us to assume their responsibilities. We need action, not words," government spokesman Pantelis Kapsis said in a statement.

The euro rose on news of a deal, which appeared to remove - at least for now - the risk of a hard default by the euro zone's most indebted country, which faces a major bond redemption on March 20. The risk premium investors charge for holding Italian and Spanish bonds fell.

However, IMF spokesman Gerry Rice said talks would continue to finalise details, making clear no agreement had been concluded yet. He said managing director Christine Lagarde wanted assurances Greece would stick to the agreed policies whatever the outcome of looming elections.

Venizelos said Athens also had an outline deal with private creditors on a bond swap in which they would give up some 70 percent of the value of their Greek bond holdings, reducing Athens' 350 billion-euro debt pile by about 100 billion euros.

"The draft agreement on private sector involvement to decrease the Greek debt burden is practically finalised, even if it will be formally approved as part of the overall package, I trust next week," EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters.

ECB President Mario Draghi said he was "quite confident" that all the components of a Greek debt deal would fall into place and hinted the central bank could provide indirect help without breaching a treaty ban on financing governments.

Euro zone finance ministers will meet again on Wednesday, by which time Athens is expected to have all elements in place, including the parliamentary approval. A debt sustainability analysis will also be finalised by then, Rehn said, adding that there would also be tighter EU oversight in Greece.

The IMF says Greece's debt-to-GDP ratio must be cut to 120 percent by 2020, but it is not clear the measures Athens is being called on to enact will be sufficient to hit that target.

Pain and more pain

The measures will mean a big fall in the living standards of many Greeks, now in the fifth year of a deep recession. Deputy Labour Minister Yannis Koutsoukos, a socialist, resigned over a package he said would be "painful for working people".

Greece's two major labour unions called a 48-hour strike for Friday and Saturday against the reforms.

"The painful measures that create misery for the youth, the unemployed and pensioners do not leave us much room," secretary general of the ADEDY union, Ilias Iliopoulos, told Reuters.

"We won't accept them. There will be a social uprising."

Earlier, Panos Beglitis, spokesman for PASOK socialists who are in coalition along with the conservative New Democracy party and far-right LAOS, said the minimum wage would be cut by 22 percent as part of efforts to make the economy more competitive.

Asked how the differences over pension cuts had been resolved, a government official told Reuters: "There will be cuts in other areas of public spending and we will see how we will minimise reductions in pensions."

New Democracy leader Antonis Samaras defended the resistance put up by Greek political parties to deeper austerity and called for a change in policy, in comments that may buttress European partners' doubts about his commitment to the programme.

"When your country is faltering and its social cohesion is at risk, can the only antidote to the crisis be even higher unemployment and two more years of recession?" Samaras said in a televised address.

"We should show the Europeans that what is happening in Greece will soon spread to the rest of Europe if we do not change the policy of an endless austerity."

But he also said the deal opened the way for a big cut in Greece's debt that would "give us hope once again".

Deeper recession

Greece has fallen deeper into recession since it received a first bailout in May 2010. Latest unemployment figures showed the jobless rate hit a record 20.9 percent in November, with youth unemployment a staggering 48 percent.

The sharper-than-forecast contraction has opened a funding gap of about 15 billion euros in the bailout package agreed last October to bring Greece's debt down to about 120 percent of gross domestic product from nearly 160 percent today.

Two sources said the government would promise spending cuts and tax rises worth 13 billion euros from 2012 to 2015, almost double the seven billion originally pledged.

To help fill the remaining gap, Athens has urged the ECB to forego profits on its Greek bond holdings in a move that could raise 12 billion euros or more.

The bank's 23-member Governing Council discussed the issue on Thursday. Draghi hinted there was a route to do that, while ruling out the ECB sustaining any loss.

Asked whether the ECB could give back profits on Greek bonds with a face value of about 50 billion euros which it bought at a discount in the market, Draghi indicated it would have to pass on the profits to governments when they were realised.,

"If the ECB distributes part of its profits to its member countries as part of the capital key, that's not monetary financing," he said.